20 May 2022
Life science businesses need to act now to avoid missing out on research and development (R&D) tax reliefs, warns RSM UK. The most significant changes to R&D tax relief since its introduction in 2000 are imminent and could impact the sector’s growth. Start-ups and fledgling businesses that rely on R&D activity overseas should review their tax position and business model now to prepare for the changes.
The life sciences sector views the R&D tax relief as a well-established, reliable tax incentive that encourages innovation. Start-ups often rely on the relief to support cashflow in the early stages of their lifecycle. However, over the past year, the government has expressed increasing concerns over the regime’s susceptibility to abuse, prompting a rethink.
A further driver behind the changes is to encourage businesses to ‘buy British’ and invest in UK businesses. The government has proposed that from April 2023, R&D relief is withdrawn for expenditure incurred overseas, including subcontracted R&D and payments to overseas workers, with some limited exemptions.
The reintroduction of the PAYE cap
Many businesses may be unaware that the pay as you earn (PAYE) cap has been reintroduced from 1 April 2021, which could have a significant impact on businesses’ cashflow. The cap restricts repayable credit available to a company to £20,000, plus 300 per cent of its total PAYE and National Insurance Contributions (NICs) liability for the period. For the life sciences sector, the cap may affect businesses that undertake collaborative work, and those which have a low UK payroll bill but significant costs on a connected party or subcontracted R&D activity.
The blanket approach to the PAYE cap means smaller companies and start-ups in the sector will be disproportionately impacted, as they are more likely to rely on outsourced labour to get new science and technology up and running before taking on in-house employees.
Restricting relief for overseas expenditure
The other significant change is the policy shift to focus on incentivising businesses to ‘buy British’, with a restriction on claims for expenditure on overseas workers or subcontracted spend. Whilst there will be a number of narrow exemptions, where R&D must be carried out overseas out of necessity (rather than convenience or preference), and also an exemption for clinical trials expenditure, we still anticipate this change having a significant impact on many businesses in the sector.
Laragh Jeanroy, RSM’s office managing partner in Cambridge and co-head of life sciences, said: ‘The pressure is now on for businesses to make sure they’re prepared. Given that the life sciences sector often conducts R&D activities overseas, such as subcontracted testing, the sector will be heavily impacted by the restriction of R&D relief for overseas expenditure.’
James Tetley, partner and national head of innovation reliefs at RSM UK, said: ‘Life sciences businesses that currently outsource R&D activities to overseas subcontractors will need to examine whether this remains feasible. Businesses are urged to carefully consider how they structure and contract R&D spend if they are to continue using the payable R&D tax credit under the current and proposed rules. Quantifying the expected impact of these changes on their tax position now can help determine whether the loss of R&D tax relief provides sufficient incentive to bring activities onshore.’
Tackling R&D abuse
Tackling the abuse of tax schemes has become an increasing priority for the government, with £161m allocated over the next five years to increase its capacity to handle tax compliance and manage debt. This is in addition to the 100 compliance officers brought in over the last two years to focus solely on the growing number of R&D claims.
The government has proposed several changes to the submission process to stamp out any disingenuous R&D claims, including the need to provide more detailed supporting documents.
James Tetley concludes: ‘With additional compliance measures increasing HMRC’s workload, there’s a greater risk of protracted enquires, denial of claims and even penalties. It is common for life sciences companies to provide very high-level descriptions when making an R&D claim, therefore it’s important they understand and meet all new requirements to avoid delays in receiving tax credits.’
RSM is hosting an online event on June 15th to help business leaders get to grips with the R&D tax changes. To register your interest in this event, fill in the form or contact Rosalind.Pontifex@rsmuk.com.